Last quarter, Federal Reserve Chair Jerome Powell
stated that the Fed did not anticipate increasing short-term interest
rates for the remainder of 2019.
Mind you that these
comments came at a point of time when signs of a possible economic slowdown was
the talk of many economists, due to an inverted yield
curve. That’s usually a sign of a possible recession
approaching, good reason for the buzz on Wall Street.
Having said this,
the underlying signs of the U.S. economy appear stronger than expected,
with first-quarter growth above expectations, coming in at a positive
annualized rate of 3.2% and unemployment hitting 3.6%.
In addition to
the job growth, productivity continues to expand well above forecasts,
while inflation remains within the Fed’s range.
Couple that with the fact that first-quarter earnings
are, for the most part, also beating
expectations. That’s helped to make gains in the stock market,
following a disappointing second half of 2018.
Weighing all these facts, I think there is a possibility the Fed may reverse its course and slip in one more 25-basis-point increase on Fed fund rates this year.
I realize that this is
a contrarian view, but the possibility does exits. Even if I’m wrong,
cash will still have greater value than it did a year ago. Your cash should be
earning over 2.0%, leading to a source of income that can have an impact
on this both year’s and next year’s budget.
At three+one®, we
continue to see public entities and higher Ed institutions with higher cash
levels than last year, a trend that has been building steadily over
the past four years.
While another rate
hike by the Fed would be a surprise for most, the biggest surprise of all could
be the reaction of those you serve if they learn that their
tax/tuition dollars were earning little or nothing.
Don’t let that happen.
Let three+one® help you maximize the value of all your cash through cashVest® , our proprietary liquidity analysis. By applying our analysis and the power of your financial institutions, the results could be surprisingly positive.
Let’s face it, markets are fickle. Just when you were getting used to earning four to five times the interest earnings you were accustomed to, you start seeing CD, T-Bill, ECR, MMDA, and LGIP rates flatten, or possibly even decline over previous months for the first time in over a year.
The short answer is: short-term rates are rising because they are more closely linked to Fed actions. With the current high-end Fed Funds target rate at 2.50%, it’s no surprise why the 1-month T-Bill rate is currently at 2.47%. Long-term rates are flattening because investors aren’t sure when the Fed’s next move will be, which is also a good indication of why the 1-year T-Bill is currently at 2.48%. Again, investors aren’t sure what the Fed’s next move is.
So, what do you do? Understand that interest rates will always be on the move. For those entities that locked-in higher rates by investing using time-horizon data, you were able to ensure your taxpayers earned anywhere between 2.60%-2.70% for monies stress tested and available for 6+ months.
The good news is that in today’s market, it’s never too late to take advantage of opportunities in the yield curve. Here are three ways you can earn and save more for your taxpayers despite a flattened yield curve:
1.) Identify how much you’re earning on ALL money. Don’t solely focus on the strategic liquidity you have for specific time horizons but also the operating dollars being used to satisfy payroll, A/P, etc. It’s a fallacy that only time deposits can help close the gap for the taxpayers. If you’re like most of the entities with whom I work, you’re also looking at earning on demand deposits, too.
2.) After analyzing each bank account and identifying where your longer-term opportunity lies, save yourself the time and trouble of rolling 30-day CDs every 30-days. If the data suggests you have time-horizon capability, use that strategic liquidity to your taxpayers’ advantage. We do not advocate public finance officials play the markets’ games. Err on the side of being as proactive and safe as possible. Keep in mind, the Chicago Mercantile Exchange’s FedWatch tool has a 47.8% probability of at least one rate cut by 1/29/2020. Now is the time to be proactive.
3.)You cannot underestimate the power of technology. Before you make up your mind that all technology is bad, consider this – with your competing priorities and time constraints, can you affordto save time and achieve better results with technology? Utilize the right bank technologies for you (the right technologies for you). Adopt AND adapt to new technological investment opportunities in the marketplace. If your investment strategy hasn’t changed in a decade, then I would seek an objective party to provide perspective for you.
As one looks through the eyes of a taxpayer, how do you think they would react to any one of the following responses from a public official when asking about how the entity manages their public cash?
1.) Why bother? Cash has no value.
2.) I don’t have the time, given all our other priorities.
3.) All our money is already invested in our bank.
4.) I don’t want to risk not having cash when I need it.
5.) I don’t currently have the staff or resources to look into this.
6.) It’s probably not going to be worth the effort.
7.) My board won’t approve it.
8.) It’s only going to bring in another $50K to$100K. That’s not enough to really impact my bottom line.
9.) All our cash is spread among so many banks and bank accounts, it would be a giant hassle.
10.) I don’t want to upset my bank or bankers.
Just imagine if those you serve heard those responses as they open their tax bill or tuition bill.
Given the financial stresses and tight margins public and higher Ed institutions experience, the need to have a single asset sitting dormant provides little cover when asked this hard question: “Why didn’t you?”
cashVest® by threeplusone® is our proprietary liquidity analysis service that helps public entities take unrecognized and underappreciated cash and turn it into a revenue-generating asset.
Cash has real value in today’s marketplace—on average 2.25%. That can add up to real income in the six- or even seven-figure levels.
As a treasurer of a public authority and a trustee to a university, I truly understand the stresses on a finance staff. One more request can mean putting something else aside. However, you do not need to do this alone. The threeplusone® team can analyze all your cash, develop time-horizon patterns on it, and work alongside you in having a conversation with your bank(s). The end result: higher earnings on your cash.
Regarding private higher Ed institutions, our liquidity analysis will substantiate your Financial Accounting Standards Board (FASB) liquidity-disclosure requirement in 2019.
Join the ranks of our clients whose most common question after using cashVest® by threeplusone® for the first time is: “Why didn’t I do this sooner?”
After developing and implementing a clear liquidity plan over the last year, Beaufort County, SC has increased its interest earning by over 300%. Treasurer Maria Walls, CPA has worked closely with her bank, investment advisors, and threeplusone to make sure every dollar that she has on hand is being put to work to earn more.
Beaufort County has an annual budget of $245 million. For fiscal year 2018 (July 2017-June 2018), Treasurer Walls recorded a record $2.9 million in interest earnings for her county. As she continues to proactively implement the County’s monthly cashVest® updates, we anticipate the County to earn over $3.5 million in interest earning for the next fiscal year.
With significant advances in all five components of the County’s cashVest update, Treasurer Walls was able to increase her score by over 20 points since the initial analysis. Here are a few ways the County has achieved over $2 million in interest earnings:
1.) By ensuring 100% of all the County funds are providing value, either through direct interest earnings or by offsetting banking fees.
2. ) The Treasurer continues to work on balancing the County’s operating balances and using threeplusone’s time-horizon data to ensure all low- and non-performing cash is receiving the maximum rate potential.
3.) The County increased the interest on operating liquidity by over 215% during the 2018 fiscal year.
4.) The Treasurer’s office adopted an investment policy that guides current and future employees in the allowable investments and restraints that maximize the County’s cash assets within the appropriate confines of safety and liquidity.
As budget season approaches, it’s time to focus on liquidity management. Let us help you achieve greater interest earnings in 2019 by identitying the value of your cash and putting it to work the way Beaufort County has.
The Federal Reserve has recently signaled a level of patience on its path of raising short-term interest rates. This is a major shift since it embarked on raising short-term rates beginning in late 2016.
On January 30, the Federal Reserve decided to maintain the current rate target range of 2.25% to 2.50%.
There are several reasons for this change in temperament: the increased volatility in the equity markets; a possible economic slowdown due to the recent government shutdown; uncertainty in other economic indicators from international trade tariffs; and concern over corporate earnings.
While these market signals of a possible slowdown may be brief (counter to my own personal beliefs), the ability to capture higher rates on your cash still exists in the marketplace.
As mentioned in previous blogs, while short-term rates may stay within a narrow range, the ability to extend your cash investments over a longer period may exist. This is a conversation you should have with your financial institution or financial advisor.
Knowing when you need your cash and how far your can extend your cash investments are the core elements of liquidity management.
At threeplusone we can provide you with time-horizon levels on all your cash, allowing you to take advantage of several opportunities that exist in today’s marketplace.
Keep in mind that every dollar you hold has value in the marketplace. As a result, having patience has its rewards. The longer you can sustain your cash investments, the greater the earnings your cash will likely produce.
Let us show you how our proprietary liquidity algorithms can help your entity—and your financial institutions—capture more earnings on your cash while staying legal, safe, and liquid.